Hermosa Beach will not enter into mediation with E & B Natural Resources to resolve a dispute over interest owed to the oil and gas company, setting the stage for future litigation.
A letter dated Oct. 23 was sent to City Attorney Michael Jenkins from Loeb & Loeb, a large law firm representing E & B. According to the letter, E & B has “no choice but to demand that the city agree in writing by 5 p.m. PDT on October 28, 2015 to agree to participate in a formal mediation of the issue of interest.” If the city does not agree to mediate, “E & B will immediately file and serve a complaint against the city.”
Jenkins said in an e-mail that the city will not engage in mediation, and that the city’s position was that all interest owed had already been paid.
Hermosa had been in litigation with MacPherson Oil for almost two decades when, in March 2012, the city entered into an agreement with E & B. The litigation between MacPherson and Hermosa stemmed from a 1995 election in which voters decided to ban oil drilling in the city, throwing a previous agreement with MacPherson into question.
Under the 2012 agreement, MacPherson would receive $30 million in exchange for abandoning its lease on mineral rights in Hermosa Beach. E & B paid $12.5 million to assume the lease. Hermosa was responsible for the remaining $17.5 million, but did not have funds available at the time, so E & B agreed to loan Hermosa the money.
E & B assumed the lease with the understanding that it could ask Hermosa voters to reconsider the issue of oil extraction in the city, setting the stage for Measure O. In March of this year, voters decisively rejected the controversial measure by a margin of more than 3 to 1.
Under the 2012 agreement, the failure of a ballot initiative would leave E & B with “no recourse against the City aside from enforcement of City’s repayment of the E & B loan.” In the event that the ballot measure failed, the agreement requires that the city “repay to E & B the full amount of the E & B loan on commercially reasonable terms to be mutually agreed upon by the City and E & B.”
The city does not dispute that interest is owed on the $17.5 million loan. However, Jenkins said that the city’s position is that interest should be calculated from March 24, 2015, the date the election results for Measure O were certified. At a rate of 5 percent, this comes out to $247,151.25, which the city has already paid.
Amy Roth, a communications officer at E & B, could not immediately offer comment on the potential litigation. Daniel G. Murphy, a partner at the Los Angeles office of Loeb & Loeb and the author of the letter to Jenkins, also would not comment.
The 2012 agreement sets the closing date as “no later than March 2, 2012,” but does not state that this is the date to be relied on in computing the “commercially reasonable terms” under which the city is obligated to pay the loan back with interest.
The city and E & B exchanged legal briefs three months ago regarding the subject of interest owed, the letter states. Since that time, the city has been unwilling to “engage in a substantive settlement dialog [sic] regarding the dispute.” According to the letter, such a refusal to negotiate comes “notwithstanding E & B’s literal rescue of the city from its own financial ruin by virtue of the settlement agreement.”
Stacey Armato, a leader in the campaign against Measure O, said E & B’s actions indicate that the company remains set on profiting from the 2012 agreement.
“Even when 80 percent of voters reject them, they’re still willing to come back and ask for more,” Armato said.
In a section of the agreement describing the city’s obligations, E & B is given the right to set the date of the election for an oil extraction ballot measure. The timing of the vote subsequently became a point of contention in the campaign. At one point, E & B sought a date of June 2015, frustrating those who wanted to align the vote on Measure O with the general election in November 2014.Â
George Schmeltzer, who was also part of the campaign against Measure O, said that E & B delayed the election as part of an attempt to drive up the interest they would collect in the event voters rejected the measure.
“It was a cynical ploy,” Schmeltzer said. “They postponed and postponed and postponed the date of the election.”
It was not stated in the letter when E & B believed interest ought to begin accruing, or exactly how much the company was seeking in interest. But the 2012 agreement set the date of closing as “no later than March 2, 2012.” Calculated from that point to Oct. 28, 2015, 5 percent interest compounded annually would amount to more than $3,400,000.
Hermosa’s potential exposure in litigation could exceed that amount. The letter accuses the city of bad faith in holding the election, “including what amounted to a de-facto official opposition by the [City] Council to the ballot initiative,” and said E & B would include claims arising out of such alleged conduct in the claim it plans to file.
Schmeltzer defended the conduct of the council in holding the election, and said such claims were meritless.
“They pretty much did everything that the oil company wanted them to do,” Schmeltzer said. “And you’re a councilperson. If people ask your opinion, I don’t think you should be prevented from giving it.” ER
